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Herbalife has been heavily covered by media and investment research over the past six months but the math suggests that buying the stock here may be a risky proposition. 2Q13 earnings impressed to the upside, but we believe further increases in earnings and/or the implied multiple being assigned by the market are unlikely over the next six months. The chart below illustrates our quantitative view of the stock; the stock is currently near the high end of its immediate-term TRADE range (overbought) with support at $54.59 and $47.64 (intermediate term TREND).  

HLF Saga Continues - hlf levels

Fundamentals Coming Out of the Shadows: In March, the multiple expansion thesis seemed credible and has played out to a degree (chart below). There are some valid concerns being raised by activists in the stock such as the FX rate being used to account for Venezuelan cash balances but, all in all, the company produced impressive results for 2Q.

What we liked:

  • EPS beat by almost 20% supported by better-than-expected revenue growth
  • Total volume points grew by 13.5%
  • $183 million in free cash flow
  • Share buy-back resuming, included in guidance
  • May buy back more than guiding to, given “under-levered” balance sheet

What we didn’t like:

  • Operating income growth of 3% versus sales growth of 18.1% (last Q 26% and 17%, respectively)
  • SG&A margin going to 32.8% of sales from 30.3% in 1Q and 29.7% in 2Q12

HLF Saga Continues - hlf valuation

Rory Green

Senior Analyst